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The 1929 Stock Market Crash

Harold Bierman, Jr., Cornell University


The 1929 stock market crash is conventionally said to have occurred on Thursday the 24th and Tuesday the 29th of October. These two dates have been dubbed “Black Thursday” and “Black Tuesday,” respectively. On September 3, 1929, the Dow Jones Industrial Average reached a record high of 381.2. At the end of the market day on Thursday, October 24, the market was at 299.5 — a 21 percent decline from the high. On this day the market fell 33 points — a drop of 9 percent — on trading that was approximately three times the normal daily volume for the first nine months of the year. By all accounts, there was a selling panic. By November 13, 1929, the market had fallen to 199. By the time the crash was completed in 1932, following an unprecedentedly large economic depression, stocks had lost nearly 90 percent of their value.

The events of Black Thursday are normally defined to be the start of the stock market crash of 1929-1932, but the series of events leading to the crash started before that date. This article examines the causes of the 1929 stock market crash. While no consensus exists about its precise causes, the article will critique some arguments and support a preferred set of conclusions. It argues that one of the primary causes was the attempt by important people and the media to stop market speculators. A second probable cause was the great expansion of investment trusts, public utility holding companies, and the amount of margin buying, all of which fueled the purchase of public utility stocks, and drove up their prices. Public utilities, utility holding companies, and investment trusts were all highly levered using large amounts of debt and preferred stock. These factors seem to have set the stage for the triggering event. This sector was vulnerable to the arrival of bad news regarding utility regulation. In October 1929, the bad news arrived and utility stocks fell dramatically. After the utilities decreased in price, margin buyers had to sell and there was then panic selling of all stocks.

The Conventional View

The crash helped bring on the depression of the thirties and the depression helped to extend the period of low stock prices, thus “proving” to many that the prices had been too high.

Laying the blame for the “boom” on speculators was common in 1929. Thus, immediately upon learning of the crash of October 24 John Maynard Keynes (Moggridge, 1981, p. 2 of Vol. XX) wrote in the New York Evening Post (25 October 1929) that “The extraordinary speculation on Wall Street in past months has driven up the rate of interest to an unprecedented level.” And the Economist when stock prices reached their low for the year repeated the theme that the U.S. stock market had been too high (November 2, 1929, p. 806): “there is warrant for hoping that the deflation of the exaggerated balloon of American stock values will be for the good of the world.” The key phrases in these quotations are “exaggerated balloon of American stock values” and “extraordinary speculation on Wall Street.” Likewise, President Herbert Hoover saw increasing stock market prices leading up to the crash as a speculative bubble manufactured by the mistakes of the Federal Reserve Board. “One of these clouds was an American wave of optimism, born of continued progress over the decade, which the Federal Reserve Board transformed into the stock-exchange Mississippi Bubble” (Hoover, 1952). Thus, the common viewpoint was that stock prices were too high.

There is much to criticize in conventional interpretations of the 1929 stock market crash, however. (Even the name is inexact. The largest losses to the market did not come in October 1929 but rather in the following two years.) In December 1929, many expert economists, including Keynes and Irving Fisher, felt that the financial crisis had ended and by April 1930 the Standard and Poor 500 composite index was at 25.92, compared to a 1929 close of 21.45. There are good reasons for thinking that the stock market was not obviously overvalued in 1929 and that it was sensible to hold most stocks in the fall of 1929 and to buy stocks in December 1929 (admittedly this investment strategy would have been terribly unsuccessful).

Were Stocks Obviously Overpriced in October 1929?
Debatable — Economic Indicators Were Strong

From 1925 to the third quarter of 1929, common stocks increased in value by 120 percent in four years, a compound annual growth of 21.8%. While this is a large rate of appreciation, it is not obvious proof of an “orgy of speculation.” The decade of the 1920s was extremely prosperous and the stock market with its rising prices reflected this prosperity as well as the expectation that the prosperity would continue.

The fact that the stock market lost 90 percent of its value from 1929 to 1932 indicates that the market, at least using one criterion (actual performance of the market), was overvalued in 1929. John Kenneth Galbraith (1961) implies that there was a speculative orgy and that the crash was predictable: “Early in 1928, the nature of the boom changed. The mass escape into make-believe, so much a part of the true speculative orgy, started in earnest.” Galbraith had no difficulty in 1961 identifying the end of the boom in 1929: “On the first of January of 1929, as a matter of probability, it was most likely that the boom would end before the year was out.”

Compare this position with the fact that Irving Fisher, one of the leading economists in the U.S. at the time, was heavily invested in stocks and was bullish before and after the October sell offs; he lost his entire wealth (including his house) before stocks started to recover. In England, John Maynard Keynes, possibly the world’s leading economist during the first half of the twentieth century, and an acknowledged master of practical finance, also lost heavily. Paul Samuelson (1979) quotes P. Sergeant Florence (another leading economist): “Keynes may have made his own fortune and that of King’s College, but the investment trust of Keynes and Dennis Robertson managed to lose my fortune in 1929.”

Galbraith’s ability to ‘forecast’ the market turn is not shared by all. Samuelson (1979) admits that: “playing as I often do the experiment of studying price profiles with their dates concealed, I discovered that I would have been caught by the 1929 debacle.” For many, the collapse from 1929 to 1933 was neither foreseeable nor inevitable.

The stock price increases leading to October 1929, were not driven solely by fools or speculators. There were also intelligent, knowledgeable investors who were buying or holding stocks in September and October 1929. Also, leading economists, both then and now, could neither anticipate nor explain the October 1929 decline of the market. Thus, the conviction that stocks were obviously overpriced is somewhat of a myth.

The nation’s total real income rose from 1921 to 1923 by 10.5% per year, and from 1923 to 1929, it rose 3.4% per year. The 1920s were, in fact, a period of real growth and prosperity. For the period of 1923-1929, wholesale prices went down 0.9% per year, reflecting moderate stable growth in the money supply during a period of healthy real growth.

Examining the manufacturing situation in the United States prior to the crash is also informative. Irving Fisher’s Stock Market Crash and After (1930) offers much data indicating that there was real growth in the manufacturing sector. The evidence presented goes a long way to explain Fisher’s optimism regarding the level of stock prices. What Fisher saw was manufacturing efficiency rapidly increasing (output per worker) as was manufacturing output and the use of electricity.

The financial fundamentals of the markets were also strong. During 1928, the price-earnings ratio for 45 industrial stocks increased from approximately 12 to approximately 14. It was over 15 in 1929 for industrials and then decreased to approximately 10 by the end of 1929. While not low, these price-earnings (P/E) ratios were by no means out of line historically. Values in this range would be considered reasonable by most market analysts today. For example, the P/E ratio of the S & P 500 in July 2003 reached a high of 33 and in May 2004 the high was 23.

The rise in stock prices was not uniform across all industries. The stocks that went up the most were in industries where the economic fundamentals indicated there was cause for large amounts of optimism. They included airplanes, agricultural implements, chemicals, department stores, steel, utilities, telephone and telegraph, electrical equipment, oil, paper, and radio. These were reasonable choices for expectations of growth.

To put the P/E ratios of 10 to 15 in perspective, note that government bonds in 1929 yielded 3.4%. Industrial bonds of investment grade were yielding 5.1%. Consider that an interest rate of 5.1% represents a 1/(0.051) = 19.6 price-earnings ratio for debt.

In 1930, the Federal Reserve Bulletin reported production in 1920 at an index of 87.1 The index went down to 67 in 1921, then climbed steadily (except for 1924) until it reached 125 in 1929. This is an annual growth rate in production of 3.1%. During the period commodity prices actually decreased. The production record for the ten-year period was exceptionally good.

Factory payrolls in September were at an index of 111 (an all-time high). In October the index dropped to 110, which beat all previous months and years except for September 1929. The factory employment measures were consistent with the payroll index.

The September unadjusted measure of freight car loadings was at 121 — also an all-time record.2 In October the loadings dropped to 118, which was a performance second only to September’s record measure.

J.W. Kendrick (1961) shows that the period 1919-1929 had an unusually high rate of change in total factor productivity. The annual rate of change of 5.3% for 1919-1929 for the manufacturing sector was more than twice the 2.5% rate of the second best period (1948-1953). Farming productivity change for 1919-1929 was second only to the period 1929-1937. Overall, the period 1919-1929 easily took first place for productivity increases, handily beating the six other time periods studied by Kendrick (all the periods studies were prior to 1961) with an annual productivity change measure of 3.7%. This was outstanding economic performance — performance which normally would justify stock market optimism.

In the first nine months of 1929, 1,436 firms announced increased dividends. In 1928, the number was only 955 and in 1927, it was 755. In September 1929 dividend increased were announced by 193 firms compared with 135 the year before. The financial news from corporations was very positive in September and October 1929.

The May issue of the National City Bank of New York Newsletter indicated the earnings statements for the first quarter of surveyed firms showed a 31% increase compared to the first quarter of 1928. The August issue showed that for 650 firms the increase for the first six months of 1929 compared to 1928 was 24.4%. In September, the results were expanded to 916 firms with a 27.4% increase. The earnings for the third quarter for 638 firms were calculated to be 14.1% larger than for 1928. This is evidence that the general level of business activity and reported profits were excellent at the end of September 1929 and the middle of October 1929.

Barrie Wigmore (1985) researched 1929 financial data for 135 firms. The market price as a percentage of year-end book value was 420% using the high prices and 181% using the low prices. However, the return on equity for the firms (using the year-end book value) was a high 16.5%. The dividend yield was 2.96% using the high stock prices and 5.9% using the low stock prices.

Article after article from January to October in business magazines carried news of outstanding economic performance. E.K. Berger and A.M. Leinbach, two staff writers of the Magazine of Wall Street, wrote in June 1929: “Business so far this year has astonished even the perennial optimists.”

To summarize: There was little hint of a severe weakness in the real economy in the months prior to October 1929. There is a great deal of evidence that in 1929 stock prices were not out of line with the real economics of the firms that had issued the stock. Leading economists were betting that common stocks in the fall of 1929 were a good buy. Conventional financial reports of corporations gave cause for optimism relative to the 1929 earnings of corporations. Price-earnings ratios, dividend amounts and changes in dividends, and earnings and changes in earnings all gave cause for stock price optimism.

Table 1 shows the average of the highs and lows of the Dow Jones Industrial Index for 1922 to 1932.

Table 1
Dow-Jones Industrials Index Average
of Lows and Highs for the Year
1922 91.0
1923 95.6
1924 104.4
1925 137.2
1926 150.9
1927 177.6
1928 245.6
1929 290.0
1930 225.8
1931 134.1
1932 79.4

Sources: 1922-1929 measures are from the Stock Market Study, U.S. Senate, 1955, pp. 40, 49, 110, and 111; 1930-1932 Wigmore, 1985, pp. 637-639.

Using the information of Table 1, from 1922 to 1929 stocks rose in value by 218.7%. This is equivalent to an 18% annual growth rate in value for the seven years. From 1929 to 1932 stocks lost 73% of their value (different indices measured at different time would give different measures of the increase and decrease). The price increases were large, but not beyond comprehension. The price decreases taken to 1932 were consistent with the fact that by 1932 there was a worldwide depression.

If we take the 386 high of September 1929 and the 1929-year end value of 248.5, the market lost 36% of its value during that four-month period. Most of us, if we held stock in September 1929 would not have sold early in October. In fact, if I had money to invest, I would have purchased after the major break on Black Thursday, October 24. (I would have been sorry.)

Events Precipitating the Crash

Although it can be argued that the stock market was not overvalued, there is evidence that many feared that it was overvalued — including the Federal Reserve Board and the United States Senate. By 1929, there were many who felt the market price of equity securities had increased too much, and this feeling was reinforced daily by the media and statements by influential government officials.

What precipitated the October 1929 crash?

My research minimizes several candidates that are frequently cited by others (see Bierman 1991, 1998, 1999, and 2001).

  • The market did not fall just because it was too high — as argued above it is not obvious that it was too high.
  • The actions of the Federal Reserve, while not always wise, cannot be directly identified with the October stock market crashes in an important way.
  • The Smoot-Hawley tariff, while looming on the horizon, was not cited by the news sources in 1929 as a factor, and was probably not important to the October 1929 market.
  • The Hatry Affair in England was not material for the New York Stock Exchange and the timing did not coincide with the October crashes.
  • Business activity news in October was generally good and there were very few hints of a coming depression.
  • Short selling and bear raids were not large enough to move the entire market.
  • Fraud and other illegal or immoral acts were not material, despite the attention they have received.

Barsky and DeLong (1990, p. 280) stress the importance of fundamentals rather than fads or fashions. “Our conclusion is that major decade-to-decade stock market movements arise predominantly from careful re-evaluation of fundamentals and less so from fads or fashions.” The argument below is consistent with their conclusion, but there will be one major exception. In September 1929, the market value of one segment of the market, the public utility sector, should be based on existing fundamentals, and fundamentals seem to have changed considerably in October 1929.

A Look at the Financial Press

Thursday, October 3, 1929, the Washington Post with a page 1 headline exclaimed “Stock Prices Crash in Frantic Selling.” the New York Times of October 4 headed a page 1 article with “Year’s Worst Break Hits Stock Market.” The article on the first page of the Times cited three contributing factors:

  • A large broker loan increase was expected (the article stated that the loans increased, but the increase was not as large as expected).
  • The statement by Philip Snowden, England’s Chancellor of the Exchequer that described America’s stock market as a “speculative orgy.”
  • Weakening of margin accounts making it necessary to sell, which further depressed prices.

While the 1928 and 1929 financial press focused extensively and excessively on broker loans and margin account activity, the statement by Snowden is the only unique relevant news event on October 3. The October 4 (p. 20) issue of the Wall Street Journal also reported the remark by Snowden that there was “a perfect orgy of speculation.” Also, on October 4, the New York Times made another editorial reference to Snowden’s American speculation orgy. It added that “Wall Street had come to recognize its truth.” The editorial also quoted Secretary of the Treasury Mellon that investors “acted as if the price of securities would infinitely advance.” The Times editor obviously thought there was excessive speculation, and agreed with Snowden.

The stock market went down on October 3 and October 4, but almost all reported business news was very optimistic. The primary negative news item was the statement by Snowden regarding the amount of speculation in the American stock market. The market had been subjected to a barrage of statements throughout the year that there was excessive speculation and that the level of stock prices was too high. There is a possibility that the Snowden comment reported on October 3 was the push that started the boulder down the hill, but there were other events that also jeopardized the level of the market.

On August 8, the Federal Reserve Bank of New York had increased the rediscount rate from 5 to 6%. On September 26 the Bank of England raised its discount rate from 5.5 to 6.5%. England was losing gold as a result of investment in the New York Stock Exchange and wanted to decrease this investment. The Hatry Case also happened in September. It was first reported on September 29, 1929. Both the collapse of the Hatry industrial empire and the increase in the investment returns available in England resulted in shrinkage of English investment (especially the financing of broker loans) in the United States, adding to the market instability in the beginning of October.

Wednesday, October 16, 1929

On Wednesday, October 16, stock prices again declined. the Washington Post (October 17, p. 1) reported “Crushing Blow Again Dealt Stock Market.” Remember, the start of the stock market crash is conventionally identified with Black Thursday, October 24, but there were price declines on October 3, 4, and 16.

The news reports of the Post on October 17 and subsequent days are important since they were Associated Press (AP) releases, thus broadly read throughout the country. The Associated Press reported (p. 1) “The index of 20 leading public utilities computed for the Associated Press by the Standard Statistics Co. dropped 19.7 points to 302.4 which contrasts with the year’s high established less than a month ago.” This index had also dropped 18.7 points on October 3 and 4.3 points on October 4. The Times (October 17, p. 38) reported, “The utility stocks suffered most as a group in the day’s break.”

The economic news after the price drops of October 3 and October 4 had been good. But the deluge of bad news regarding public utility regulation seems to have truly upset the market. On Saturday, October 19, the Washington Post headlined (p. 13) “20 Utility Stocks Hit New Low Mark” and (Associated Press) “The utility shares again broke wide open and the general list came tumbling down almost half as far.” The October 20 issue of the Post had another relevant AP article (p. 12) “The selling again concentrated today on the utilities, which were in general depressed to the lowest levels since early July.”

An evaluation of the October 16 break in the New York Times on Sunday, October 20 (pp. 1 and 29) gave the following favorable factors:

  • stable business condition
  • low money rates (5%)
  • good retail trade
  • revival of the bond market
  • buying power of investment trusts
  • largest short interest in history (this is the total dollar value of stock sold where the investors do not own the stock they sold)

The following negative factors were described:

  • undigested investment trusts and new common stock shares
  • increase in broker loans
  • some high stock prices
  • agricultural prices lower
  • nervous market

The negative factors were not very upsetting to an investor if one was optimistic that the real economic boom (business prosperity) would continue. The Times failed to consider the impact on the market of the news concerning the regulation of public utilities.

Monday, October 21, 1929

On Monday, October 21, the market went down again. The Times (October 22) identified the causes to be

  • margin sellers (buyers on margin being forced to sell)
  • foreign money liquidating
  • skillful short selling

The same newspaper carried an article about a talk by Irving Fisher (p. 24) “Fisher says prices of stocks are low.” Fisher also defended investment trusts as offering investors diversification, thus reduced risk. He was reminded by a person attending the talk that in May he had “pointed out that predicting the human behavior of the market was quite different from analyzing its economic soundness.” Fisher was better with fundamentals than market psychology.

Wednesday, October 23, 1929

On Wednesday, October 23 the market tumbled. The Times headlines (October 24, p.1) said “Prices of Stocks Crash in Heavy Liquidation.” The Washington Post (p. 1) had “Huge Selling Wave Creates Near-Panic as Stocks Collapse.” In a total market value of $87 billion the market declined $4 billion — a 4.6% drop. If the events of the next day (Black Thursday) had not occurred, October 23 would have gone down in history as a major stock market event. But October 24 was to make the “Crash” of October 23 become merely a “Dip.”

The Times lamented October 24, (p. 38) “There was hardly a single item of news which might be construed as bearish.”

Thursday, October 24, 1929

Thursday, October 24 (Black Thursday) was a 12,894,650 share day (the previous record was 8,246,742 shares on March 26, 1929) on the NYSE. The headline on page one of the Times (October 25) was “Treasury Officials Blame Speculation.”

The Times (p. 41) moaned that the cost of call money had been 20% in March and the price break in March was understandable. (A call loan is a loan payable on demand of the lender.) Call money on October 24 cost only 5%. There should not have been a crash. The Friday Wall Street Journal (October 25) gave New York bankers credit for stopping the price decline with $1 billion of support.

the Washington Post (October 26, p. 1) reported “Market Drop Fails to Alarm Officials.” The “officials” were all in Washington. The rest of the country seemed alarmed. On October 25, the market gained. President Hoover made a statement on Friday regarding the excellent state of business, but then added how building and construction had been adversely “affected by the high interest rates induced by stock speculation” (New York Times, October 26, p. 1). A Times editorial (p. 16) quoted Snowden’s “orgy of speculation” again.

Tuesday, October 29, 1929

The Sunday, October 27 edition of the Times had a two-column article “Bay State Utilities Face Investigation.” It implied that regulation in Massachusetts was going to be less friendly towards utilities. Stocks again went down on Monday, October 28. There were 9,212,800 shares traded (3,000,000 in the final hour). The Times on Tuesday, October 29 again carried an article on the New York public utility investigating committee being critical of the rate making process. October 29 was “Black Tuesday.” The headline the next day was “Stocks Collapse in 16,410,030 Share Day” (October 30, p. 1). Stocks lost nearly $16 billion in the month of October or 18% of the beginning of the month value. Twenty-nine public utilities (tabulated by the New York Times) lost $5.1 billion in the month, by far the largest loss of any of the industries listed by the Times. The value of the stocks of all public utilities went down by more than $5.1 billion.

An Interpretive Overview of Events and Issues

My interpretation of these events is that the statement by Snowden, Chancellor of the Exchequer, indicating the presence of a speculative orgy in America is likely to have triggered the October 3 break. Public utility stocks had been driven up by an explosion of investment trust formation and investing. The trusts, to a large extent, bought stock on margin with funds loaned not by banks but by “others.” These funds were very sensitive to any market weakness. Public utility regulation was being reviewed by the Federal Trade Commission, New York City, New York State, and Massachusetts, and these reviews were watched by the other regulatory commissions and by investors. The sell-off of utility stocks from October 16 to October 23 weakened prices and created “margin selling” and withdrawal of capital by the nervous “other” money. Then on October 24, the selling panic happened.

There are three topics that require expansion. First, there is the setting of the climate concerning speculation that may have led to the possibility of relatively specific issues being able to trigger a general market decline. Second, there are investment trusts, utility holding companies, and margin buying that seem to have resulted in one sector being very over-levered and overvalued. Third, there are the public utility stocks that appear to be the best candidate as the actual trigger of the crash.

Contemporary Worries of Excessive Speculation

During 1929, the public was bombarded with statements of outrage by public officials regarding the speculative orgy taking place on the New York Stock Exchange. If the media say something often enough, a large percentage of the public may come to believe it. By October 29 the overall opinion was that there had been excessive speculation and the market had been too high. Galbraith (1961), Kindleberger (1978), and Malkiel (1996) all clearly accept this assumption. the Federal Reserve Bulletin of February 1929 states that the Federal Reserve would restrain the use of “credit facilities in aid of the growth of speculative credit.”

In the spring of 1929, the U.S. Senate adopted a resolution stating that the Senate would support legislation “necessary to correct the evil complained of and prevent illegitimate and harmful speculation” (Bierman, 1991).

The President of the Investment Bankers Association of America, Trowbridge Callaway, gave a talk in which he spoke of “the orgy of speculation which clouded the country’s vision.”

Adolph Casper Miller, an outspoken member of the Federal Reserve Board from its beginning described 1929 as “this period of optimism gone wild and cupidity gone drunk.”

Myron C. Taylor, head of U.S. Steel described “the folly of the speculative frenzy that lifted securities to levels far beyond any warrant of supporting profits.”

Herbert Hoover becoming president in March 1929 was a very significant event. He was a good friend and neighbor of Adolph Miller (see above) and Miller reinforced Hoover’s fears. Hoover was an aggressive foe of speculation. For example, he wrote, “I sent individually for the editors and publishers of major newspapers and magazine and requested them systematically to warn the country against speculation and the unduly high price of stocks.” Hoover then pressured Secretary of the Treasury Andrew Mellon and Governor of the Federal Reserve Board Roy Young “to strangle the speculative movement.” In his memoirs (1952) he titled his Chapter 2 “We Attempt to Stop the Orgy of Speculation” reflecting Snowden’s influence.

Buying on Margin

Margin buying during the 1920’s was not controlled by the government. It was controlled by brokers interested in their own well-being. The average margin requirement was 50% of the stock price prior to October 1929. On selected stocks, it was as high as 75%. When the crash came, no major brokerage firm was bankrupted, because the brokers managed their finances in a conservative manner. At the end of October, margins were lowered to 25%.

Brokers’ loans received a lot of attention in England, as they did in the United States. The Financial Times reported the level and the changes in the amount regularly. For example, the October 4 issue indicated that on October 3 broker loans reached a record high as money rates dropped from 7.5% to 6%. By October 9, money rates had dropped further to below .06. Thus, investors prior to October 24 had relatively easy access to funds at the lowest rate since July 1928.

The Financial Times (October 7, 1929, p. 3) reported that the President of the American Bankers Association was concerned about the level of credit for securities and had given a talk in which he stated, “Bankers are gravely alarmed over the mounting volume of credit being employed in carrying security loans, both by brokers and by individuals.” The Financial Times was also concerned with the buying of investment trusts on margin and the lack of credit to support the bull market.

My conclusion is that the margin buying was a likely factor in causing stock prices to go up, but there is no reason to conclude that margin buying triggered the October crash. Once the selling rush began, however, the calling of margin loans probably exacerbated the price declines. (A calling of margin loans requires the stock buyer to contribute more cash to the broker or the broker sells the stock to get the cash.)

Investment Trusts

By 1929, investment trusts were very popular with investors. These trusts were the 1929 version of closed-end mutual funds. In recent years seasoned closed-end mutual funds sell at a discount to their fundamental value. The fundamental value is the sum of the market values of the fund’s components (securities in the portfolio). In 1929, the investment trusts sold at a premium — i.e. higher than the value of the underlying stocks. Malkiel concludes (p. 51) that this “provides clinching evidence of wide-scale stock-market irrationality during the 1920s.” However, Malkiel also notes (p. 442) “as of the mid-1990’s, Berkshire Hathaway shares were selling at a hefty premium over the value of assets it owned.” Warren Buffett is the guiding force behind Berkshire Hathaway’s great success as an investor. If we were to conclude that rational investors would currently pay a premium for Warren Buffet’s expertise, then we should reject a conclusion that the 1929 market was obviously irrational. We have current evidence that rational investors will pay a premium for what they consider to be superior money management skills.

There were $1 billion of investment trusts sold to investors in the first eight months of 1929 compared to $400 million in the entire 1928. the Economist reported that this was important (October 12, 1929, p. 665). “Much of the recent increase is to be accounted for by the extraordinary burst of investment trust financing.” In September alone $643 million was invested in investment trusts (Financial Times, October 21, p. 3). While the two sets of numbers (from the Economist and the Financial Times) are not exactly comparable, both sets of numbers indicate that investment trusts had become very popular by October 1929.

The common stocks of trusts that had used debt or preferred stock leverage were particularly vulnerable to the stock price declines. For example, the Goldman Sachs Trading Corporation was highly levered with preferred stock and the value of its common stock fell from $104 a share to less than $3 in 1933. Many of the trusts were levered, but the leverage of choice was not debt but rather preferred stock.

In concept, investment trusts were sensible. They offered expert management and diversification. Unfortunately, in 1929 a diversification of stocks was not going to be a big help given the universal price declines. Irving Fisher on September 6, 1929 was quoted in the New York Herald Tribune as stating: “The present high levels of stock prices and corresponding low levels of dividend returns are due largely to two factors. One, the anticipation of large dividend returns in the immediate future; and two, reduction of risk to investors largely brought about through investment diversification made possible for the investor by investment trusts.”

If a researcher could find out the composition of the portfolio of a couple of dozen of the largest investment trusts as of September-October 1929 this would be extremely helpful. Seven important types of information that are not readily available but would be of interest are:

  • The percentage of the portfolio that was public utilities.
  • The extent of diversification.
  • The percentage of the portfolios that was NYSE firms.
  • The investment turnover.
  • The ratio of market price to net asset value at various points in time.
  • The amount of debt and preferred stock leverage used.
  • Who bought the trusts and how long they held.

The ideal information to establish whether market prices are excessively high compared to intrinsic values is to have both the prices and well-defined intrinsic values at the same moment in time. For the normal financial security, this is impossible since the intrinsic values are not objectively well defined. There are two exceptions. DeLong and Schleifer (1991) followed one path, very cleverly choosing to study closed-end mutual funds. Some of these funds were traded on the stock market and the market values of the securities in the funds’ portfolios are a very reasonable estimate of the intrinsic value. DeLong and Schleifer state (1991, p. 675):

“We use the difference between prices and net asset values of closed-end mutual funds at the end of the 1920s to estimate the degree to which the stock market was overvalued on the eve of the 1929 crash. We conclude that the stocks making up the S&P composite were priced at least 30 percent above fundamentals in late summer, 1929.”

Unfortunately (p. 682) “portfolios were rarely published and net asset values rarely calculated.” It was only after the crash that investment trusts started to reveal routinely their net asset value. In the third quarter of 1929 (p. 682), “three types of event seemed to trigger a closed-end fund’s publication of its portfolio.” The three events were (1) listing on the New York Stock Exchange (most of the trusts were not listed), (2) start up of a new closed-end fund (this stock price reflects selling pressure), and (3) shares selling at a discount from net asset value (in September 1929 most trusts were not selling at a discount, the inclusion of any that were introduces a bias). After 1929, some trusts revealed 1929 net asset values. Thus, DeLong and Schleifer lacked the amount and quality of information that would have allowed definite conclusions. In fact, if investors also lacked the information regarding the portfolio composition we would have to place investment trusts in a unique investment category where investment decisions were made without reliable financial statements. If investors in the third quarter of 1929 did not know the current net asset value of investment trusts, this fact is significant.

The closed-end funds were an attractive vehicle to study since the market for investment trusts in 1929 was large and growing rapidly. In August and September alone over $1 billion of new funds were launched. DeLong and Schleifer found the premiums of price over value to be large — the median was about 50% in the third quarter of 1929) (p. 678). But they worried about the validity of their study because funds were not selected randomly.

DeLong and Schleifer had limited data (pp. 698-699). For example, for September 1929 there were two observations, for August 1929 there were five, and for July there were nine. The nine funds observed in July 1929 had the following premia: 277%, 152%, 48%, 22%, 18% (2 times), 8% (3 times). Given that closed-end funds tend to sell at a discount, the positive premiums are interesting. Given the conventional perspective in 1929 that financial experts could manager money better than the person not plugged into the street, it is not surprising that some investors were willing to pay for expertise and to buy shares in investment trusts. Thus, a premium for investment trusts does not imply the same premium for other stocks.

The Public Utility Sector

In addition to investment trusts, intrinsic values are usually well defined for regulated public utilities. The general rule applied by regulatory authorities is to allow utilities to earn a “fair return” on an allowed rate base. The fair return is defined to be equal to a utility’s weighted average cost of capital. There are several reasons why a public utility can earn more or less than a fair return, but the target set by the regulatory authority is the weighted average cost of capital.

Thus, if a utility has an allowed rate equity base of $X and is allowed to earn a return of r, (rX in terms of dollars) after one year the firm’s equity will be worth X + rX or (1 + r)X with a present value of X. (This assumes that r is the return required by the market as well as the return allowed by regulators.) Thus, the present value of the equity is equal to the present rate base, and the stock price should be equal to the rate base per share. Given the nature of public utility accounting, the book value of a utility’s stock is approximately equal to the rate base.

There can be time periods where the utility can earn more (or less) than the allowed return. The reasons for this include regulatory lag, changes in efficiency, changes in the weather, and changes in the mix and number of customers. Also, the cost of equity may be different than the allowed return because of inaccurate (or incorrect) or changing capital market conditions. Thus, the stock price may differ from the book value, but one would not expect the stock price to be very much different than the book value per share for very long. There should be a tendency for the stock price to revert to the book value for a public utility supplying an essential service where there is no effective competition, and the rate commission is effectively allowing a fair return to be earned.

In 1929, public utility stock prices were in excess of three times their book values. Consider, for example, the following measures (Wigmore, 1985, p. 39) for five operating utilities.

border=”1″ cellspacing=”0″ cellpadding=”2″ class=”encyclopedia” width=”580″>

1929 Price-earnings Ratio

High Price for Year

Market Price/Book Value

Commonwealth Edison



Consolidated Gas of New York



Detroit Edison



Pacific Gas & Electric



Public Service of New Jersey



Sooner or later this price bubble had to break unless the regulatory authorities were to decide to allow the utilities to earn more than a fair return, or an infinite stream of greater fools existed. The decision made by the Massachusetts Public Utility Commission in October 1929 applicable to the Edison Electric Illuminating Company of Boston made clear that neither of these improbable events were going to happen (see below).

The utilities bubble did burst. Between the end of September and the end of November 1929, industrial stocks fell by 48%, railroads by 32% and utilities by 55% — thus utilities dropped the furthest from the highs. A comparison of the beginning of the year prices and the highest prices is also of interest: industrials rose by 20%, railroads by 19%, and utilities by 48%. The growth in value for utilities during the first nine months of 1929 was more than twice that of the other two groups.

The following high and low prices for 1929 for a typical set of public utilities and holding companies illustrate how severely public utility prices were hit by the crash (New York Times, 1 January 1930 quotations.)

Firm High Price Low Price Low Price DividedBy High Price
American Power & Light 1753/8 641/4 .37
American Superpower 711/8 15 .21
Brooklyn Gas 2481/2 99 .44
Buffalo, Niagara & Eastern Power 128 611/8 .48
Cities Service 681/8 20 .29
Consolidated Gas Co. of N.Y. 1831/4 801/8 .44
Electric Bond and Share 189 50 .26
Long Island Lighting 91 40 .44
Niagara Hudson Power 303/4 111/4 .37
Transamerica 673/8 201/4 .30

Picking on one segment of the market as the cause of a general break in the market is not obviously correct. But the combination of an overpriced utility segment and investment trusts with a portion of the market that had purchased on margin appears to be a viable explanation. In addition, as of September 1, 1929 utilities industry represented $14.8 billion of value or 18% of the value of the outstanding shares on the NYSE. Thus, they were a large sector, capable of exerting a powerful influence on the overall market. Moreover, many contemporaries pointed to the utility sector as an important force in triggering the market decline.

The October 19, 1929 issue of the Commercial and Financial Chronicle identified the main depressing influences on the market to be the indications of a recession in steel and the refusal of the Massachusetts Department of Public Utilities to allow Edison Electric Illuminating Company of Boston to split its stock. The explanations offered by the Department — that the stock was not worth its price and the company’s dividend would have to be reduced — made the situation worse.

the Washington Post (October 17, p. 1) in explaining the October 16 market declines (an Associated Press release) reported, “Professional traders also were obviously distressed at the printed remarks regarding inflation of power and light securities by the Massachusetts Public Utility Commission in its recent decision.”

Straws That Broke the Camel’s Back?

Edison Electric of Boston

On August 2, 1929, the New York Times reported that the Directors of the Edison Electric Illuminating Company of Boston had called a meeting of stockholders to obtain authorization for a stock split. The stock went up to a high of $440. Its book value was $164 (the ratio of price to book value was 2.6, which was less than many other utilities).

On Saturday (October 12, p. 27) the Times reported that on Friday the Massachusetts Department of Public Utilities has rejected the stock split. The heading said “Bars Stock Split by Boston Edison. Criticizes Dividend Policy. Holds Rates Should Not Be Raised Until Company Can Reduce Charge for Electricity.” Boston Edison lost 15 points for the day even though the decision was released after the Friday closing. The high for the year was $440 and the stock closed at $360 on Friday.

The Massachusetts Department of Public Utilities (New York Times, October 12, p. 27) did not want to imply to investors that this was the “forerunner of substantial increases in dividends.” They stated that the expectation of increased dividends was not justified, offered “scathing criticisms of the company” (October 16, p. 42) and concluded “the public will take over such utilities as try to gobble up all profits available.”

On October 15, the Boston City Council advised the mayor to initiate legislation for public ownership of Edison, on October 16, the Department announced it would investigate the level of rates being charged by Edison, and on October 19, it set the dates for the inquiry. On Tuesday, October 15 (p. 41), there was a discussion in the Times of the Massachusetts decision in the column “Topic in Wall Street.” It “excited intense interest in public utility circles yesterday and undoubtedly had effect in depressing the issues of this group. The decision is a far-reaching one and Wall Street expressed the greatest interest in what effect it will have, if any, upon commissions in other States.”

Boston Edison had closed at 360 on Friday, October 11, before the announcement was released. It dropped 61 points at its low on Monday, (October 14) but closed at 328, a loss of 32 points.

On October 16 (p. 42), the Times reported that Governor Allen of Massachusetts was launching a full investigation of Boston Edison including “dividends, depreciation, and surplus.”

One major factor that can be identified leading to the price break for public utilities was the ruling by the Massachusetts Public Utility Commission. The only specific action was that it refused to permit Edison Electric Illuminating Company of Boston to split its stock. Standard financial theory predicts that the primary effect of a stock split would be to reduce the stock price by 50% and would leave the total value unchanged, thus the denial of the split was not economically significant, and the stock split should have been easy to grant. But the Commission made it clear it had additional messages to communicate. For example, the Financial Times (October 16, 1929, p. 7) reported that the Commission advised the company to “reduce the selling price to the consumer.” Boston was paying $.085 per kilowatt-hour and Cambridge only $.055. There were also rumors of public ownership and a shifting of control. The next day (October 17), the Times reported (p. 3) “The worst pressure was against Public Utility shares” and the headline read “Electric Issue Hard Hit.”

Public Utility Regulation in New York

Massachusetts was not alone in challenging the profit levels of utilities. The Federal Trade Commission, New York City, and New York State were all challenging the status of public utility regulation. New York Governor (Franklin D. Roosevelt) appointed a committee on October 8 to investigate the regulation of public utilities in the state. The Committee stated, “this inquiry is likely to have far-reaching effects and may lead to similar action in other States.” Both the October 17 and October 19 issues of the Times carried articles regarding the New York investigative committee. Professor Bonbright, a Roosevelt appointee, described the regulatory process as a “vicious system” (October 19, p. 21), which ignored consumers. The Chairman of the Public Service Commission, testifying before the Committee wanted more control over utility holding companies, especially management fees and other transfers.

The New York State Committee also noted the increasing importance of investment trusts: “mention of the influence of the investment trust on utility securities is too important for this committee to ignore” (New York Times, October 17, p. 18). They conjectured that the trusts had $3.5 billion to invest, and “their influence has become very important” (p. 18).

In New York City Mayor Jimmy Walker was fighting the accusation of graft charges with statements that his administration would fight aggressively against rate increases, thus proving that he had not accepted bribes (New York Times, October 23). It is reasonable to conclude that the October 16 break was related to the news from Massachusetts and New York.

On October 17, the New York Times (p. 18) reported that the Committee on Public Service Securities of the Investment Banking Association warned against “speculative and uniformed buying.” The Committee published a report in which it asked for care in buying shares in utilities.

On Black Thursday, October 24, the market panic began. The market dropped from 305.87 to 272.32 (a 34 point drop, or 9%) and closed at 299.47. The declines were led by the motor stocks and public utilities.

The Public Utility Multipliers and Leverage

Public utilities were a very important segment of the stock market, and even more importantly, any change in public utility stock values resulted in larger changes in equity wealth. In 1929, there were three potentially important multipliers that meant that any change in a public utility’s underlying value would result in a larger value change in the market and in the investor’s value.

Consider the following hypothetical values for a public utility:

Book value per share for a utility $50

Market price per share 162.502

Market price of investment trust holding stock (assuming a 100% 325.00

premium over market value)

Eliminating the utility’s $112.50 market price premium over book value, the market price of the investment trust would be $50 without a premium. The loss in market value of the stock of the investment trust and the utility would be $387.50 (with no premium). The $387.50 is equal to the $112.50 loss in underlying stock value and the $275 reduction in investment trust stock value. The public utility holding companies, in fact, were even more vulnerable to a stock price change since their ratio of price to book value averaged 4.44 (Wigmore, p. 43). The $387.50 loss in market value implies investments in both the firm’s stock and the investment trust.

For simplicity, this discussion has assumed the trust held all the holding company stock. The effects shown would be reduced if the trust held only a fraction of the stock. However, this discussion has also assumed that no debt or margin was used to finance the investment. Assume the individual investors invested only $162.50 of their money and borrowed $162.50 to buy the investment trust stock costing $325. If the utility stock went down from $162.50 to $50 and the trust still sold at a 100% premium, the trust would sell at $100 and the investors would have lost 100% of their investment since the investors owe $162.50. The vulnerability of the margin investor buying a trust stock that has invested in a utility is obvious.

These highly levered non-operating utilities offered an opportunity for speculation. The holding company typically owned 100% of the operating companies’ stock and both entities were levered (there could be more than two levels of leverage). There were also holding companies that owned holding companies (e.g., Ebasco). Wigmore (p. 43) lists nine of the largest public utility holding companies. The ratio of the low 1929 price to the high price (average) was 33%. These stocks were even more volatile than the publicly owned utilities.

The amount of leverage (both debt and preferred stock) used in the utility sector may have been enormous, but we cannot tell for certain. Assume that a utility purchases an asset that costs $1,000,000 and that asset is financed with 40% stock ($400,000). A utility holding company owns the utility stock and is also financed with 40% stock ($160,000). A second utility holding company owns the first and it is financed with 40% stock ($64,000). An investment trust owns the second holding company’s stock and is financed with 40% stock ($25,600). An investor buys the investment trust’s common stock using 50% margin and investing $12,800 in the stock. Thus, the $1,000,000 utility asset is financed with $12,800 of equity capital.

When the large amount of leverage is combined with the inflated prices of the public utility stock, both holding company stocks, and the investment trust the problem is even more dramatic. Continuing the above example, assume the $1,000,000 asset again financed with $600,000 of debt and $400,000 common stock, but the common stock has a $1,200,000 market value. The first utility holding company has $720,000 of debt and $480,000 of common. The second holding company has $288,000 of debt and $192,000 of stock. The investment trust has $115,200 of debt and $76,800 of stock. The investor uses $38,400 of margin debt. The $1,000,000 asset is supporting $1,761,600 of debt. The investor’s $38,400 of equity is very much in jeopardy.

Conclusions and Lessons

Although no consensus has been reached on the causes of the 1929 stock market crash, the evidence cited above suggests that it may have been that the fear of speculation helped push the stock market to the brink of collapse. It is possible that Hoover’s aggressive campaign against speculation, helped by the overpriced public utilities hit by the Massachusetts Public Utility Commission decision and statements and the vulnerable margin investors, triggered the October selling panic and the consequences that followed.

An important first event may have been Lord Snowden’s reference to the speculative orgy in America. The resulting decline in stock prices weakened margin positions. When several governmental bodies indicated that public utilities in the future were not going to be able to justify their market prices, the decreases in utility stock prices resulted in margin positions being further weakened resulting in general selling. At some stage, the selling panic started and the crash resulted.

What can we learn from the 1929 crash? There are many lessons, but a handful seem to be most applicable to today’s stock market.

  • There is a delicate balance between optimism and pessimism regarding the stock market. Statements and actions by government officials can affect the sensitivity of stock prices to events. Call a market overpriced often enough, and investors may begin to believe it.
  • The fact that stocks can lose 40% of their value in a month and 90% over three years suggests the desirability of diversification (including assets other than stocks). Remember, some investors lose all of their investment when the market falls 40%.
  • A levered investment portfolio amplifies the swings of the stock market. Some investment securities have leverage built into them (e.g., stocks of highly levered firms, options, and stock index futures).
  • A series of presumably undramatic events may establish a setting for a wide price decline.
  • A segment of the market can experience bad news and a price decline that infects the broader market. In 1929, it seems to have been public utilities. In 2000, high technology firms were candidates.
  • Interpreting events and assigning blame is unreliable if there has not been an adequate passage of time and opportunity for reflection and analysis — and is difficult even with decades of hindsight.
  • It is difficult to predict a major market turn with any degree of reliability. It is impressive that in September 1929, Roger Babson predicted the collapse of the stock market, but he had been predicting a collapse for many years. Also, even Babson recommended diversification and was against complete liquidation of stock investments (Financial Chronicle, September 7, 1929, p. 1505).
  • Even a market that is not excessively high can collapse. Both market psychology and the underlying economics are relevant.


Barsky, Robert B. and J. Bradford DeLong. “Bull and Bear Markets in the Twentieth Century,” Journal of Economic History 50, no. 2 (1990): 265-281.

Bierman, Harold, Jr. The Great Myths of 1929 and the Lessons to be Learned. Westport, CT: Greenwood Press, 1991.

Bierman, Harold, Jr. The Causes of the 1929 Stock Market Crash. Westport, CT, Greenwood Press, 1998.

Bierman, Harold, Jr. “The Reasons Stock Crashed in 1929.” Journal of Investing (1999): 11-18.

Bierman, Harold, Jr. “Bad Market Days,” World Economics (2001) 177-191.

Commercial and Financial Chronicle, 1929 issues.

Committee on Banking and Currency. Hearings on Performance of the National and Federal Reserve Banking System. Washington, 1931.

DeLong, J. Bradford and Andrei Schleifer, “The Stock Market Bubble of 1929: Evidence from Closed-end Mutual Funds.” Journal of Economic History 51, no. 3 (1991): 675-700.

Federal Reserve Bulletin, February, 1929.

Fisher, Irving. The Stock Market Crash and After. New York: Macmillan, 1930.

Galbraith, John K. The Great Crash, 1929. Boston, Houghton Mifflin, 1961.

Hoover, Herbert. The Memoirs of Herbert Hoover. New York, Macmillan, 1952.

Kendrick, John W. Productivity Trends in the United States. Princeton University Press, 1961.

Kindleberger, Charles P. Manias, Panics, and Crashes. New York, Basic Books, 1978.

Malkiel, Burton G., A Random Walk Down Wall Street. New York, Norton, 1975 and 1996.

Moggridge, Donald. The Collected Writings of John Maynard Keynes, Volume XX. New York: Macmillan, 1981.

New York Times, 1929 and 1930.

Rappoport, Peter and Eugene N. White, “Was There a Bubble in the 1929 Stock Market?” Journal of Economic History 53, no. 3 (1993): 549-574.

Samuelson, Paul A. “Myths and Realities about the Crash and Depression.” Journal of Portfolio Management (1979): 9.

Senate Committee on Banking and Currency. Stock Exchange Practices. Washington, 1928.

Siegel, Jeremy J. “The Equity Premium: Stock and Bond Returns since 1802,”

Financial Analysts Journal 48, no. 1 (1992): 28-46.

Wall Street Journal, October 1929.

Washington Post, October 1929.

Wigmore, Barry A. The Crash and Its Aftermath: A History of Securities Markets in the United States, 1929-1933. Greenwood Press, Westport, 1985.

1 1923-25 average = 100.

2 Based a price to book value ratio of 3.25 (Wigmore, p. 39).

Citation: Bierman, Harold. “The 1929 Stock Market Crash”. EH.Net Encyclopedia, edited by Robert Whaples. March 26, 2008. URL

How the Republicans Caused the Stock Market Crash of 1929: GPT’s, Failed Transitions, and Commercial Policy

Author(s):Beaudreau, Bernard C.
Reviewer(s):Ramirez, Carlos D.

Published by EH.NET (August 2007)

Bernard C. Beaudreau, How the Republicans Caused the Stock Market Crash of 1929: GPT’s, Failed Transitions, and Commercial Policy. Lincoln, NE: iUniverse, 2005. xx + 200 pp. $19 (paperback), ISBN: 0-595-37908-7.

Reviewed for EH.NET by Carlos D. Ramirez, Department of Economics, George Mason University.

In his book, Bernard C. Beaudreau (Professor of Economics at Universite Laval, Quebec City, Canada) “presents an alternative view of the Stock Market Boom and Crash of 1929 as having resulted from government intervention, specifically from a case of flawed government policy in the form of the Republican Party’s 1928 election promise of an upward tariff revision ? the Smoot-Hawley Tariff Bill” (p. xi). He claims that the tariff aggravated the problem of “underincome” (which he defines as the failure of aggregate income and expenditures to rise commensurately with productive capacity), thereby amplifying the extent of the Depression.

The logic of his argument is as follows: The technological progress of the 1910s and 1920s, manifested by the increasing adoption of electricity-based, mass production processes (coined in the book as “extremely-high-throughput, continuous-flow mass production techniques,” or EHTCFPT), resulted in a phenomenal increase in industrial productive capacity throughout the 1920s. But this increase in capacity was not accompanied by an increase in wages, and thus expenditures did not increase commensurately. Beaudreau argues that the government’s first response to resolve the problem of “underincome” was to resort to tariff protection (e.g. the Smoot-Hawley Act). By protecting domestic markets, the tariff would increase sales, employment, and earnings. In fact, Beaudreau argues that initially the stock market reacted positively to the tariff as investors were anticipating future higher sales. He even points out that the stock market crashed in October of 1929 as a result of bad news regarding the implementation of the tariff ? by October of 1929 it was presumably apparent that the tariff bill would not be enacted as a coalition of “Insurgent Republicans” and Democrats called for lower tariffs on manufactures. By December of that year, he continues, the tariff was no longer being perceived as being “good news” as investors this time were anticipating retaliatory tariffs from trading partners. Thus, when the tariff finally made it into law in 1930, the stock market reaction was largely negative. According to the logic of the argument, then, before December of 1929, the tariff bill was perceived to be “good news” by investors. After December, however, it was perceived to be “bad.” Besides, he argues, the tariff aggravated the problem of “underincome” because it further stimulated firms to adopt EHTCFPT, as they wanted to increase their production capacity in anticipation of future higher demand.

After realizing the failure of the tariff to resolve the problem of “underincome,” Beaudreau argues, the government resorted to the National Industrial Recovery Act of 1933 as a second response. However, this response also ultimately failed to completely resolve the “underincome” problem. In the end, Beaudreau returns to the tariff issue and argues that it was an ill-conceived policy idea since according to his estimates the output gap was too large to be resolved by the tariff alone.

The argument is laid out in eight chapters. Chapter 1 presents an overview of the history of U.S. tariff policy (and even tariff theory) from the antebellum period to the early twentieth century, all in ten pages. Chapter 2 presents the “Theory of Underincome,” which is presented as an exchange game between two players: producers and merchants. Because of a coordination failure, it is possible that “income inertia” or “underincome” arises in equilibrium. Chapter 3 provides an account of the innovation process in American manufacturing, based on the electrification of the production process. It uses Ford Motor Company as an illustrative case of how the U.S. became industrialized by relying on EHTCFPT. This chapter also provides an account of the spread of electric power across several industries. Chapter 4 then moves to the core of his thesis arguing that the U.S. was suffering from “underincome” and that Congress’s first response was to increase protection. Chapter 5 extends this argument, and provides “a blow-by-blow account of the demise of the Smoot-Hawley Tariff Bill of 1929” and how the stock market reacted. Chapter 6 provides some details on the “Second Policy Response” ? the implementation of the National Industrial Recovery Act of 1933. In chapter 7, Beaudreau returns to the tariff issue, providing quantitative estimates of the amount of output gap. Beaudreau argues that the tariff was doomed to fail from the very beginning, as it was a policy response that was too weak, given the size of the output gap. Chapter 8 provides a brief summary and some concluding remarks.

In all honesty, it is very unlikely that readers will find Beaudreau’s argument to be persuasive. To begin with, the theory of “underincome” appears not to be all that different from a textbook description of a Keynesian-style slump in aggregate demand. Viewed from this perspective, Beaudreau’s “underincome” hypothesis is, at best, not new, at worst, very convoluted and hard to follow. Equally unconvincing is the suggestion that Republicans were responsible for the stock market crash of 1929 (as the title implies) because by October of that year, investors thought that the tariff bill was “as good as dead.” To make such a connection, at the very least, Beaudreau should have performed a formal event study, studying the behavior of stocks that were most exposed to the tariff bill, and compare it to the behavior of stocks immune to the implementation of the tariff.

This isn’t the first time that Beaudreau has made the claim that Republicans were somehow responsible for the stock market crash, or that too much technology was bad for the economy. A very similar argument is presented in his earlier book published in 1996. In fact, William Hausman reviewed Beaudreau’s 1996 book (Mass Production, the Stock Market Crash, and the Great Depression: The Macroeconomics of Electrification_, Westport, CT: Greenwood Press) for EH.NET in 1998 (see Unsurprisingly, it did not leave a very positive impression on him either.

Carlos D. Ramirez is Associate Professor of Economics at George Mason University. His major fields of research are banking and financial economic history. He has published banking and financial history articles in the Journal of Finance, Journal of Money, Credit, and Banking, Journal of Economic History, and Public Choice.

Subject(s):Macroeconomics and Fluctuations
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

Mass Production, the Stock Market Crash, and the Great Depression: The Macroeconomics of Electrification

Author(s):Beaudreau, Bernard C.
Reviewer(s):Hausman, William J.


Published by EH.NET (February 1998)

Bernard C. Beaudreau, Mass Production, the Stock Market Crash, and the Great Depression: The Macroeconomics of Electrification. Westport: Greenwood Press, 1996. xx + 182 pp. $59.95 (cloth), ISBN: 031329920X.

Reviewed for EH.NET by William J. Hausman, Department of Economics, College of William and Mary.

Beaudreau asserts boldly on the first page of his book that his purpose is to “provide a definitive account of the Great Depression and the events leading up to this cataclysmic event” (p. xv). At least he didn’t claim to have written “the” definitive account. In fact, this is a highly idiosyncratic treatment that explores a number of events of the ‘teens, 20s, and 30s. There is much that is outrageous, along with occasional insights that warrant further study. The fundamental argument is that productivity-enhancing structural changes in industry in the 1920s set the stage for the events that were to follow. The treatment of the period thus fits within the basic approach economic historians such as Michael Bernstein (The Great Depression: Delayed Recovery and Economic Change, 1929-1939, Cambridge University Press, 1987) and, more recently, Rick Szostak (Technological Innovation and the Great Depression, Westview Press, 1995) have taken.

The chain of logic is clearly defined but long. The electrification of industry (“the most important process innovation in this century”), because it set the process in motion, is actually the villain of the piece. The electrification of the assembly line in the 1920s (a process led by the Ford Motor Company) substantially raised productivity and led to an era of mass production. This brought conditions of “oversupply,” initially hidden by labor hoarding. Eventually, aggregate income failed to keep pace with productivity, not because profits rose substantially, but because wages failed to rise. By 1928 Senator Reed Smoot, with the support of Hoover, proposed restricting access to the U.S. market by raising tariffs. The prospect of passage of the tariff bill in 1928 set off the speculative stock market boom. The failure of the bill in the Senate the following year precipitated the stock market crash. Planned investment then was cut drastically, setting off the decline in income and the Great Depression. The National Industrial Recovery Act was the only policy response that had a chance of reversing the process, but this experiment in cooperative behavior aided by government was cut short by the Supreme Court. This is all laid out in the introduction. Twelve chapters, each of them short, then attempt to either flesh out the bare bones of the logic, or offer asides on some aspect of the historical process.

Because the chain of logic is long, it can be attacked at numerous points. Take, for example, the monocausal view of the course of the stock market. In two chapters and an appendix, Beaudreau links the prospects of the tariff bill as reported in the press to stock market activity. A correlation can be established, but the causality is obscure, relying heavily on an indirect link to planned business investment. One important aspect of the event that is not mentioned is the fact that industrial stocks actually rose much less than public utility stocks, especially stocks of public utility holding companies, a sector not much affected by the prospective tariff. In the end the correlation is not sufficient to prove the point.

The book contains some interesting chapters. In one, a game-theoretic model is used to show how an economy may get stuck in a low-growth equilibrium in the presence of a productivity-enhancing technological shock. It carries some heavy assumptions, the critical one being that firms will not raise wages in response to the shock (without some third-party intervention). It is conceivable that such a process had a role to play in bringing on the depression.

This book is not a definitive account of the events surrounding the Great Depression. The basic approach of exploring structural changes as the root cause of the depression is, however, a worthy endeavor. Perhaps if the author had been more modest in his claims, my reaction would not have been as critical.

William J. Hausman Department of Economics College of William and Mary

Will Hausman is the author of “Long-term Trends in Energy Prices,” in Julian L. Simon, ed., The State of Humanity, Oxford: Blackwell Publishers, 1995, and other papers on the history of the U.S. electric utility industry.


Subject(s):Macroeconomics and Fluctuations
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

Why Stock Markets Crash: Critical Events in Complex Financial Systems

Author(s):Sornette, Didier
Reviewer(s):Santoni, Gary

Published by EH.NET (April 2003)

Didier Sornette, Why Stock Markets Crash: Critical Events in Complex

Financial Systems. Princeton, NJ: Princeton University Press, 2002. xx +

421 pp. $29.95 (hardcover), ISBN: 0-691-09630-9.

Reviewed for EH.NET by Gary Santoni, Department of Economics, Ball State


Why Stock Markets Crash by Didier Sornette is an interesting and

thought-provoking book. Sornette is a professor of geophysics at the University

of California, Los Angeles who specializes in the scientific prediction of

catastrophes. Since stock market crashes are, without question, catastrophes,

the reader might expect an informative treatment of the relationship between

catastrophes that occur in the natural world and those that occur in financial

markets. Sornette’s discussion of the science of earthquakes, volcanic

eruptions, hurricanes, tornadoes and meteorite impacts is riveting. In

addition, the reader learns about how such notions as finite-time

singularities, log periodic oscillations, Cantor sets, fractal dimensions,

Schrodinger’s equation and log-quasi-periodicity, are used to characterize and

predict these natural disasters. Readers interested in why stock markets crash

and the relationship between these events and natural catastrophes will be

disappointed, however.

Clearly, natural and financial phenomena are similar in that catastrophes occur

in both. It is something else to argue that the processes leading to these

events and the relevant tools of analysis are the same or even similar. George

Stigler once noted that the economist faces a level of difficulty not shared by

the physical scientist. The economist’s “main elements of analysis are people.

… Imagine the problems of a chemist if he had to deal with molecules of

oxygen, each of which was somewhat interested in whether it was joined in

chemical bond to hydrogen. Some would hurry him along; others would cry shrilly

for a federal program to drill wells for water instead; and several would

blandly assure him that they were molecules of argon.”1 None of this is meant

to suggest that the scientific method has no place in the study of economics.

Few economists did more than Stigler to promote the application of science in

economics but he warns that the economist can expect to encounter some special


Sornette bumps up against one of these special problems in his discussion of

the fundamentals of stock prices. He argues that, “These considerations make it

clear that it is the expectation of future earnings and future capital

gains rather than present economic reality that motivates the average investor,

thus creating a speculative bubble” (p. 270). Sornette fails to recognize that

stock prices (or, more precisely, the choices people make in determining these

prices) are always based on expectations regarding the future — and

this implies nothing about whether or not they contain a speculative bubble.

Irving Fisher said it best when he noted that, “Our present acts must be

controlled by the future, not as it actually is, but as it appears to us

through the veil of chance.”2 Decisions regarding stocks are no exception.

Expected future cash flows (dividends, capital gains, etc.) are the

important fundamentals of prices — they are the economic reality. Present

earnings, Sornette’s reality, are only relevant in so far as they contain

information about the future. The behavior of people, unlike molecules of

oxygen, is driven by expectations.

The most enlightening discussion in Sornette’s book is his treatment of the

efficient markets hypothesis in Chapters 2 and 3. This hypothesis implies that

stock prices move at a random walk so that changes in the price are

unpredictable. Since crashes are simply large negative changes in price, the

hypothesis implies that crashes cannot be predicted. While the evidence that

has accumulated over the years is largely consistent with this idea, an

interesting exception to this general result is noted in Chapter 3. Examining

daily data on the Dow Jones Industrial Average over the last century, Sornette

finds 14 episodes — a total of 64 trading days out of a sample of about 25,000

— that violate the implications of the hypothesis. These unusual observations

are all associated with large declines in stock prices ranging from -12.4% to

-30.7% (p. 61). The conclusion to be drawn from this is that stock prices

behave unusually (in the sense that successive changes in them may be related

and, hence, predictable) during episodes of large price declines.

There are several points that are important here. These unusual episodes only

occur during periods of large price declines. Second, there are relatively few

of them — 64 of 25,000 trading days. Third, the average length of these 14

episodes is only 4.5 days so the period over which prediction may be possible

is of short duration. Finally, these periods are only detectable after

prices have begun to decline. For the vast bulk of the evidence Sornette

analyzes (particularly, when prices are generally rising), changes in stock

prices behave randomly and, thus, are unpredictable.

Perhaps because of the confusion regarding the role of expectations in economic

decision-making, Sornette ignores the efficient market hypothesis and the

evidence regarding it in the remainder of his book and focuses instead on

various bubble models of stock prices all of which imply that prices behave

unusually before a crash, i.e., while prices are generally rising. In

this regard, the reader is treated to discussions of the Ising Model of

Cooperative Behavior, El-Farol’s Bar Problem, Mimetic Contagion and the Urn

Model, and Herd Behavior and Crowd Effects to name a few. Sornette models the

bubble with an equation containing a log-periodic correction to a power law for

a variable (stock prices) exhibiting a finite-time singularity. In short,

Sornette attempts to fit a trend to stock prices for periods prior to crashes

even though the data analyzed in Chapter 3 suggest that no such trend exists.

As might be expected, the results are disappointing even though the test

periods selected are those immediately preceding 1929 and 1987, the two largest

crashes on record. The statistic measuring the equation’s goodness of fit

varies erratically as the sample period prior to the crash is varied and shows

a marked improvement only when data subsequent to the crash are included. Thus,

the model “predicts” the crash only after it has occurred (pp. 330-34).

Sornette indicates that this is an “idiosyncrasy” of the model, which, of

course, calls into question its relevance for both theory and practice.

People will always be interested in stock market crashes. If they were

understood, it might be possible to forecast them which, of course, could lead

to vast riches. I wish Sornette good luck in his endeavor. Should he be

successful, I don’t expect he will tell us about it, however.

Endnotes: 1. George Stigler, The Theory of Price, Macmillan Company,

1966, p. 8. 2. Irving Fisher, The Rate of Interest, Macmillan Company,

1907, p. 213.

Gary Santoni’s recent publications include “Expected Dividend Growth,

Valuation Ratios and Rational Optimism,” in the Journal of Financial and

Economic Practice (Fall, 2002).

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Crash! How the Economic Boom and Bust of the 1920s Worked

Author(s):Payne, Phillip G.
Reviewer(s):Parker, Randall

Published by EH.Net (September 2017)

Phillip G. Payne, Crash! How the Economic Boom and Bust of the 1920s Worked. Baltimore: Johns Hopkins University Press, 2015. viii +142 pp. $20 (paperback), ISBN: 978-1-4214-1856-8.

Reviewed for EH.Net by Randall Parker, Department of Economics, East Carolina University.


Crash! is a part of the “How Things Worked” series being published by Johns Hopkins University Press. The list of books included in this series is not particularly long (at least not yet) and includes books on Ellis Island, sod busting, and Union Army recruitment of U.S. colored troops, among other topics. I like the idea behind this series, and the editors have really done themselves proud by having Phillip Payne author this book on the boom and bust of the 1920s. It is the first entry in the series pertaining to economic history.

Payne is a professor of history at St. Bonaventure University. If the idea behind the “How Things Worked” series is to produce non-technical books that provide useful road maps that hit the high points of historical epochs and give undergraduates the fundamental knowledge they need to understand the basics of what went on and why, then Crash! accomplishes what it sets out to do. Payne provides an in-depth look at the 1920s and the emergence of speculation and how the culture and economy of the time promoted that unhealthy trait (that still afflicts us today and ever shall). All the usual suspects and their stories are told: James Riordan and Ivar Kreuger (and others who did themselves in), Richard Whitney and his attempt to save U.S. Steel share prices, J.P. Morgan and others. The roles they played in bringing about the unfortunate events of 1929 and the beginning of the Depression with the stock market crash are described with historical elegance and come alive in the words of Payne. The level of detail of the events and the actors that made them happen represent a new and fresh look at a familiar, and certainly guilty, culprit in helping to bring about the Great Depression.

The last thirty pages of the book are also a road map for the essential elements of the recovery from the Depression, the emergence and governance of Franklin Roosevelt and the New Deal, plus an Epilogue comparing the 1920s to the malaise we endured in 2008. Correctly saying “How This Time Is (Not) Different,” we are reminded that this pattern will almost certainly repeat sometime down the road.

There are some particularly enlightening parts of the book. The West Virginia Coal Wars in the early 1920s and the use of air power against American civilians is not something economists hear much about. But the shock I felt when I read about it cannot be overstated. Moreover, I had forgotten that Herbert Hoover blamed World War I for the Great Depression. Payne reminds us that it was not Peter Temin who originally made this connection, although Temin did it for the right reasons and blamed the establishment of the interwar gold standard in a changed world in which the gold standard no longer functioned well and was an agent of deflation and depression.

There are several spots where the economics of the era are just briefly mentioned and not discussed much. There is no mention of the major debate of whether there was a bubble in stocks or not in the 1920s. This is far from clear from the literature — and my judgment is that it never will be decided. Alas, there is only one sentence mentioning that both Irving Fisher and John Maynard Keynes thought stock prices would continue to grow and both lost their fortunes. Moreover, there is no discussion of how deflation and the gold standard were linked. The recession of 1920-21 is blamed on deflation with no mention of this necessity for the re-establishment of a gold-backed currency at antebellum prices. But I do not wish to overstate the case. Payne does what he sets out to do and he is to be credited for such a readable book (indeed I read it twice!).

There is one matter, however, that cannot be unmentioned. I joined this club many years ago when James Hamilton showed me the error of my ways in a working paper I had sent him. It is a club to which Phillip Payne now belongs — and he should delight in being a part of this club as the membership list is long . . . and now we have one more. In four different places, he refers to “the Bank of the United States.” Well, it is really “the Bank of United States,” there is no “the” between “of” and “United.” Welcome to the club Professor Payne. And thanks for this very useful historical description of the bumpy road during the interwar period.

Randall Parker is editor of The Seminal Works of the Great Depression (Edward Elgar, 2011) and co-editor (with Robert Whaples) of The Handbook of Modern Economic History and The Handbook of Major Events in Economic History (both from Routledge, 2013).

Copyright (c) 2017 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (September 2017). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Macroeconomics and Fluctuations
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

The Great Crash of 1929: A Reconciliation of Theory and Evidence

Author(s):Kabiri, Ali
Reviewer(s):Hekimian, Raphaël

Published by EH.Net (August 2015)

Ali Kabiri, The Great Crash of 1929: A Reconciliation of Theory and Evidence. Basingstoke, UK: Palgrave Macmillan, 2014. xv + 236 pp. $115 (hardcover), ISBN: 978-1-137-37288-8.

Reviewed for EH.Net by Raphaël Hekimian, West Paris University and the Paris School of Economics, and David Le Bris, KEDGE Business School.

The New York Stock Exchange (NYSE) crash in 1929, which featured a 45 percent decline in stock prices over the last weeks of October, is one of the most studied topics in financial history, and academic researchers still fiercely debate many of its aspects. Among those, we can cite the crucial question of whether or not the stock market boom of the 1920s was justified by fundamental values. The Great Crash of 1929: A Reconciliation of Theory and Evidence aims at resolving this issue: could the rise in stock prices before the crash be seen as an asset “bubble,” and if so, could it have been anticipated?

Ali Kabiri relies on both contemporaries (Smith 1924) and more recent academic research (Shiller 1981, 2000; Goetzmann and Ibbotson 2006) to provide extensive and detailed empirical analysis. After checking some of their results with new hand-collected data, the book details a range of econometric tests and robustness checks in order to rigorously analyze ex ante and ex post stock prices movements between 1921 and 1932.

The book is organized into six chapters. After an introduction, chapter two reviews the modern literature on the financial history of the 1920s, the different types of tests used in this literature, the theory of asset “bubbles,” and the Efficiency Market Hypothesis (EMH).

Chapter 3 focuses on the historical background of the U.S. economy, providing a detailed look at debt levels in various economic sectors, in particular the housing debt held within the banking sector. In addition, Kabiri considers the Gold Standard system and the newly formed Federal Reserve and its interest rate policy, and the effect of credit expansion on U.S. corporate earnings and stock prices. The chapter ends with a look at productivity growth and expected inflation as drivers of the valuation of assets. The main results are that the first part of the boom (1921-1927) can be attributed to a credit/debt expansion coming from World War I monetary base expansion, along with an expectation of higher returns or lower risk premia on U.S. common stocks.

The fourth chapter looks at the dynamics of U.S. common stock prices from 1870 up to 2010. The author tests market efficiency with a long-term asset prices perspective, using historical data to observe both ex ante expectations and ex post realizations of stocks returns. The objective here is to test for a potential deviation from rational valuation during the second part of the boom (1927-1929) in three ways. First, at the aggregate level: the author estimates the scale of the overvaluation of stocks in September 1929. In order to replicate the 1920’s investors’ expectations, he applies a method of that time (Smith, 1924) to a set of common stocks of large firms between 1900 and 1929 to calculate the dividend growth rate; accepting the hypothesis that expectations of that time were formed according to financial theories of that time. The historical Equity Risk Premium (ERP) before 1927, taken from both recent (Goetzmann and Ibbotson 2006) and contemporary (Smith 1924) research, is used as a discount rate to solve a Dividend Discount Model. This market valuation is then compared to the actual level reached in 1929, so as to estimate the scale of the overvaluation, following the basic method of Schiller (1981). According to this method, the estimated overvaluation of U.S. common stocks is found to revolve around 50 percent. Secondly, an ex post analysis of the very long-run realized returns is run. The aim is to test if investors could have anticipated an upcoming growth in dividends in 1927, before the second phase of the boom. To do so, the author constructs a total return index (cautiously avoiding the survivorship bias) using data from 1925 up to 2010. This return is then compared with real returns of government bonds to deduct a realized equity premium, which is found to be similar to the historical ERP calculated in Smith (1924). According to the author, this indicates that high returns were not forthcoming on stocks when compared to historical figures, so perfect foresight should have prevented rational investors from expecting a higher dividend growth rate in the late 1920’s. Finally, the aviation industry, a technological sector potentially prone to overvaluation in the 1920s, is tested using a valuation model available in the Moody’s Manual of Investments (1930). The model is calibrated with historical data from 1904 to 1929 of the automobile industry’s growth path. This test implies that aviation stocks were overvalued in 1929 by around 300 percent, relative to the history of the automobile industry. It means that a rational investor in 1929 would not have held those stocks in his portfolio.

Chapter 5 investigates the role of the money market in the boom and bust of the NYSE. It is known that the Federal Reserve took measures to slow down speculation by restraining credit to banks and funds under regulation. The author argues that a sort of ‘shadow banking system” had been developing to lend to traders, as a regulatory arbitrage. Funds were coming mostly from U.S. unrestricted corporations, but also investment funds and foreign banks. In order to assess whether the crash was due to an exogenous shock stemming from a credit retraction of those unregulated sources, tests of the ratio of stock prices to credit are run. Data show that the crash was not induced by a credit contraction even if regulation arbitrage generated instability. The results are more in favor of a bubble reversal in stock prices.

Finally, chapter 6 studies stock prices movements with regards to their fundamental values but during the 1929-1932 period. According to the data, it seems as if an undervaluation occurred during the Great Contraction based on ex post analysis. The conclusion is that the low level of the market in 1932 cannot be fully explained by rational forecasts, meaning that irrational pessimism probably took place.

Ali Kabiri’s book provides a synthesis of the debates on the 1929 crash but also a new set of tests built on both existing and newly collected data to understand which forces drove the stock market to levels reached in the 1920s, based on both ex-ante and ex-post analysis. In financial history, the book provides new insights on how investors could have valued stocks with respect to available information and, this is an important hypothesis, methods at the time.  He also finds evidence of the deviation in prices based on ex post fundamental values. In addition, the book contributes to behavioral economics, estimating the rationality of the rise and fall in stock prices during the boom and bust as well as to history of economic thought, detailing financial theories and methods of the 1920s.

Raphaël Hekimian is a Ph.D. student at the West Paris University and the Paris School of Economics. He is also research assistant for DFIH, a database project collecting and keying financial historical data on the Paris Stock Exchange. David Le Bris is an assistant professor at KEDGE Business School. He has written several articles about the history of the French financial market. Using daily data, they work together examining the absence of any contagion of the 1929 U.S. crash to the French stock market.

Copyright (c) 2015 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (August 2015). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

The Great Mirror of Folly: Finance, Culture and the Crash of 1720

Editor(s):Goetzmann, William N.
Labio, Catherine
Rouwenhorst, K. Geert
Young, Timothy G.
Reviewer(s):Murphy, Antoin E.

Published by EH.Net (March 2014)

William N. Goetzmann, Catherine Labio, K. Geert Rouwenhorst and Timothy G. Young, editors, The Great Mirror of Folly: Finance, Culture and the Crash of 1720. New Haven: Yale University Press, 2013. xiv + 346 pp. $75 (hardcover), ISBN: 978-0-300-16246-2.

Reviewed for EH.Net by Antoin E. Murphy, Department of Economics, Trinity College Dublin.

This is a wonderful book about an extraordinary work, Het Groote Tafereel der Dwaasheid (The Great Mirror of Folly), which though a bibliographic nightmare, provides a fascinating set of engravings and texts about the world’s first stock market booms and collapses in Paris, London and Amsterdam during the frenzied financial year of 1720. Yale University is to be congratulated not only for publishing such a book through Yale University Press, but, also because two of its libraries, the Beinecke Rare Book and Manuscripts Library and the Lewis Walpole Library, have against the current, been presciently building up a financial history collection that provides many of the antiquarian treasures that are presented in this volume.

When the financial crisis broke in 2007 and 2008 many economists who had forgotten about history, naively believing that the Great Moderation had been reached, found themselves on intellectual quicksand. Despite all their apparently sophisticated theorizing they were unable, excepting for a small number of economists including the foreword writer of this book, Nobel laureate Robert J. Schiller, to cast very much light on the unfolding events which destroyed a great part of the financial fabric of the United States and, via contagion effects, nearly brought down the global economy. History had been replaced by mathematical modelling; antiquarian books had been discarded and libraries holding them downgraded; the past was seen as no predictor of the future. But of course history does have a tendency to repeat itself. Remove the wigs from the eighteenth century bankers, financiers and traders and replace them with mobile phones and one finds essentially the same type of agents with all their excessive hype that characterized recent financial markets not just in New York but across the globe. The Great Mirror of Folly of the eighteenth century has most certainly been mirrored in the follies at the start of the twenty-first century. If one accepts this view then there are still important roles for antiquarian books, specialist libraries, economic historians and historians of economic thought to highlight how apparently rational people become irrational, inhabiting asset market bubbles that have huge economic and social costs when they burst. So take a bow Yale along with the editorial team that published this book.

The Tafereel, which aimed at providing “a warning for future generations,” was first published in 1720. From a bibliographic perspective it is an enigma because no two copies of it are alike. The printers appear to have had a portfolio of as many as 85 engravings along with attendant plays, poems, proposals for bubble companies, etc., from which to select the composition of each volume. Kuniko Forrer’s remarkably detailed bibliographical interpretation explains that though “we may well compare the Tafereel to a kit that readers were expected to put together by following instructions for use,” in fact “purchasers were free to organize the volume as they chose” (p. 35). Though this volume presents what the editors describe as the “ideal” Tafereel of 74 plates, I feel this decision, perhaps taken on economic grounds, is somewhat disappointing because it necessarily means that not all the plates figuring in some issues of the Tafereel appear. That said, in its very first publication the Tafereel contained only 35 plates

The plates provide its readers with, as Frans de Bruyn, points out a surreal world of “dreamscapes populated with fantastic creatures, mythological characters, hunchback harlequins, devils, dwarves, monkeys, and lizard like reptiles” (p. 21). Hot air, stoked by bellows, and leading to the creation of bubbles abounds in many of the plates. The work is a giant piece of satire aimed at denigrating the greed and hubris of the speculators of 1720. It is easy, of course, ex post to satirize the events of 1719 and 1720 in this way after the bubbles had burst – the first Tafereel was published in late 1720. However, this is to do an injustice to John Law and the Mississippi System. Law was extraordinarily modern and innovative, believing that it was possible to replace specie money with paper money and to create a private sector company capable of managing both the national debt and at the same time developing colonial territories, particularly those in North America.  His vision of a specie-less society would ultimately become the norm in the twentieth century and his attempts at financial innovation served to show how lateral thinking on this front could change society. Rik Frehen, William Goetzmann and Geert Rouwenhorst point out in chapter 4 that though the democratization of capital that suddenly appeared in 1720 was quickly satirized by the literati of the day, “these equity booms were the clear forerunners of future capital markets” and that “ultimately the world’s stock markets re-emerged to provide widespread public access to investment in business enterprise” (p. 84).  Consistent with this line, Eugene White, in a thoughtful re-assessment of Law, asks the question as to whether modern scholars who have re-assessed Law as a great theorist, modernizer and macroeconomist “might be justified in tagging the Dutch volume a scurrilous eighteenth-century blog that defamed John Law and his scheme to liberate France from the shackles of the ancien régime finance” (p. 114).

This is a book of great scholarship and one that should adorn the shelves of all those interested in money, banking, financial innovation, bubbles and the behavior of people during asset market crashes.  At $75 it is a steal and could over the years appreciate at a faster rate than many of today’s banking shares!

Antoin E. Murphy is the author of numerous books and articles, including John Law: Economic Theorist and Policymaker (Oxford University Press, 1997).

Copyright (c) 2014 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (March 2014). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):Europe
Time Period(s):18th Century

A Nation of Small Shareholders: Marketing Wall Street after World War II

Author(s):Traflet, Janice M.
Reviewer(s):Doti, Lynne Pierson

Published by EH.Net (July 2013)
Janice M. Traflet, A Nation of Small Shareholders: Marketing Wall Street after World War II. Baltimore: Johns Hopkins University Press, 2013. xi + 242 pp. $45 (hardcover), ISBN: 978-1-4214-0902-3.

Reviewed for EH.Net by Lynne Pierson Doti, School of Business and Economics, Chapman University

Don?t let the frivolous dust jacket fool you. While A Nation of Small Shareholders is very readable, it represents some very serious scholarship. Janice Traflet is a bona fide historian and an excellent writer. Moreover, as an associate professor in the School of Management at Bucknell University, she has a strong understanding about how a financial business operates. With this perspective, she has produced a unique history of how the New York Stock Exchange marketed equities to the consumer, especially in the 1950s and 1960s.

After World War II, the New York Stock Exchange (NYSE) and the average household had ambivalent attitudes about each other.? The NYSE watched covetously as consumer income rose and households invested heavily in bonds, life insurance and homes.? However, a JP Morgan partner Thomas Lamont represented the attitudes of many market experts when he blamed the 1929 crash on these investors of moderate means (as he put it, ?every Tom, Dick and Harry?) and hoped these people would not be in the market in the future. It was also true that the average household remembered the shadow of 1929 and preferred safer, more accessible and better marketed investments to shares of stock.

After the 1930s though, tightened regulations, particularly by the Securities and Exchange Commission (SEC), a reorganization of the NYSE board, and the rising number and reputation of companies listed on the NYSE made even average-income consumers feel that stocks could be a safe investment.? About that time, a few brokerage houses began marketing stocks to the ?small investor.? Those brokerage firms who were members of the NYSE were mildly encouraged to make these appeals ?as long as advertisements were truthful and in good taste? (p. 41).

Charles Merrill was a leader in marketing stocks and had a conservative reputation stemming from his 1928 warnings to clients to reduce their risk. In 1940, his brokerage firm began an advertising campaign directed toward potential clients with modest amounts of investment funds. The firm would become a leader in this type of marketing in the 1950s, not only advertising in print, but also offering investment seminars and information booths to educate their customers.

Some of the earlier Merrill ads explained how a stock exchange encouraged the operation of a free market. The NYSE discussed starting a similar campaign, but found the members would not financially support it. However, when G. Keith Funston became the new president of the NYSE in 1951, he made it clear that the board would be engaged in marketing. Serving the NYSE until 1967, he established the advertising theme as soon as he decorated his office with a picture of Independence Hall. Buying stocks listed on the NYSE was investing in America. He said the NYSE was the ?epitome of free enterprise? (p. 73). A few years later, Funston started a department to coordinate the marketing efforts of industry and trade associations, companies listed on the NYSE and institutions that invested in those companies. The NYSE?s own slogan became ?Own Your Share of American Business.? The campaign to make stock ownership synonymous with patriotism and anti-communism was soon prevalent in many advertisements. A rising stock market in 1953 and 1954 also helped boost stock ownership.

There was still a problem attracting investors with limited funds. Commissions were dependent on the size of the order. The NYSE and some brokerage firms developed a monthly investment plan (MIP) to allow customers to commit to paying a monthly sum for a set period. Rather than saving up for a ?round lot? of 100 shares, the customer would gain ownership of the shares as they paid for them. As the price of the stock fluctuated, each monthly payment earned more or less shares. This was a solid plan for investors who only wanted to buy stock in one or a few companies, but mutual funds offered greater portfolio diversification and experienced very strong growth in the 1950s. ?In 1940, less than 300,000 mutual fund accounts existed. By 1955, the number of mutual fund accounts had ballooned to more than two million? (p. 105). This was in spite of the fact that mutual funds were still not allowed to advertise (but did sell door-to-door!).

In the mid-1950s, the NYSE established a department for public education. The department coordinated free speakers and produced brochures for consumers. By the 1960s the exchange provided thousands of lectures a year in libraries, service clubs and other venues that would attract the smaller investments.

The NYSE would be substantially changed in the 1960s and 1970s. An increase in the importance of institutional trading of securities resulted from consumers investments in mutual funds, pension funds and life insurance. For the exchange, the focus turned from marketing to operating efficiency.

The 1980s saw the beginning of the long bull market and the end of fixed commissions. With the end of fixed commissions and the internet came e-trading by small investors. The story comes full circle, from overcoming consumer fear of the equity market in the post war period to the 2001-2002 declines in the market, which once again created fear among small investors.

The focus of this book is on the NYSE and its experiences attracting the average consumer into stock investment, in the post-war period. However, as such it adds an important piece to the literature on the history of the American equity market. Financial historians like Robert Sobel (The Big Board: A History of the New York Stock Market) or Charles Geisst (100 Years of Wall Street) will benefit greatly by this meticulous research. The book will also be interesting to general business historians and to marketing students, academics and business professionals.

Lynne Pierson Doti is the David and Sandra Stone Professor of Economics at the Argyros School of Business and Economics, Chapman University. She is currently working on a book on the history of real estate financing in California.

Copyright (c) 2013 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (July 2013). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

The Hellhound of Wall Street: How Ferdinand Pecora?s Investigation of the Great Crash Forever Changed American Finance

Author(s):Perino, Michael
Reviewer(s):Ramirez, Carlos D.

Published by EH.NET (October 2011)

Michael Perino, The Hellhound of Wall Street: How Ferdinand Pecora?s Investigation of the Great Crash Forever Changed American Finance. New York: Penguin Press, 2010. ix + 341 pp. $28 (hardcover), ISBN: 978-1-59420-272-8.

Reviewed for EH.NET by Carlos D. Ramirez, Department of Economics, George Mason University.

Between 1929 and 1933 the U.S. economy endured the largest contraction in history. Real GNP fell by more than a quarter, the stock market collapsed, unemployment reached a staggering 25 percent, the banking sector was decimated, and panics were the order of the day. People lost a lot of money, faith in the system, and for many, even hope. It was inevitable that such a cataclysmic scenario would result in a large public outcry demanding politicians to do something. Congress?s reaction was to follow the Hollywood-style legislative process: quickly identify the ?villains,? condemn them, and then politically execute them. In the process, congressmen enacted legislation, thereby becoming the ?heroes? who saved the day, and everyone lived happily ever after.

At the time, it was the Wall Street bankers who got to play the role of villains. These ?banksters? ostensibly followed practices that ultimately caused the collapse of the banking system. Such was the political theater within which Ferdinand Pecora operated. Pecora was a Sicilian-born lawyer that Senator Peter Norbeck (R-South Dakota) had selected to become Chief Counsel of the U.S. Senate Committee on Banking and Currency on January 22, 1933.? Pecora?s mission was to investigate the so-called corrupt Wall Street banking practices that were seen as being largely responsible to the economic calamity of the period. His first and probably most important target was Charles Mitchell, then Chief Executive of National City, the bank with the largest network of bond and securities dealings. Michael Perino?s book provides a detailed account of how Pecora uncovered the ?evils? and ?abuses? that that Mitchell had committed. Largely through Pecora?s hearings, the public?s perception of bankers dramatically shifted, making them look like the scum of the earth for their unlimited ?greed,? ?arrogance,? and ?unscrupulous? behavior.

Perino?s book is well written — it is engaging and entertaining. However, he ends up idealizing Pecora and demonizing Mitchell. This is very unfortunate, because by exalting Pecora?s view of the world, Perino panders to the now discredited theory that bankers somehow caused the Depression. (Even if Pecora did not intend to make this causal inference, it was largely interpreted as such.) Back then, the bankers were held responsible for the economic ills of the period because they had not stuck to the sound practices of the ?real bills? doctrine — that bank lending should be limited to short term, self-liquidating loans (Huertas and Silverman, 1986, p. 88). Had they stuck to that model, by implication, the excesses of the 1920s would not have happened, and maybe even the economic calamity of the 1930s could have been avoided.

That Progressive interpretation of the events is now largely defunct. Take, for example, the allegation that ?stock pools? were used to manipulate stocks. Indeed, this allegation was one of the primary motivations for the creation of the Securities Exchange Act of 1934. But the research of Jiang, Mahoney, and Mei (2005) finds no evidence that these pools affected stock prices in the long run, or that they adversely affected small investors.

Perino claims that Pecora wanted to show ?all the reckless, inappropriate, and imprudent actions that Mitchell and others at City Bank had taken, but he always treated Mitchell and his ilk as prime examples of what was wrong in commercial and investment banking. … Mitchell was not an aberration; he was representative of bankers as a class.? (p. 221) The implication is, of course, that bankers allegedly abused their depositors? trust by underwriting securities of poor quality. But Puri (1994) shows the exact opposite occurred: ?The evidence shows that, contrary to conventional wisdom, bank underwritten issues defaulted less than non-bank underwritten issues, over a seven year period from the issue date, and had a significantly lower mortality rate.? Kroszner and Rajan (1994) arrive at a similar conclusion. They find that the failure rate of bonds originated and placed through bank affiliates was no higher than that of bonds placed through investment banking syndicates. This research, unfortunately, is not cited.
What about the claim that bank involvement in the business of underwriting securities was somehow responsible for the decimation of the banking system? Once again, the evidence does not support it. White (1986), for instance, finds that the failure rate for all national banks in the 1930-33 period was 26.3%. However, the failure rate of national banks that were also involved in the securities business was only 7.2%. Hence it is hard to argue that the involvement of banks in the securities business is responsible for the high failure rate of banks during that period.

Indeed, modern research has gone as far as to question the evidence that the hearings supposedly uncovered. Benston (1990) argues that the investigation did not reveal any credible evidence of the alleged abuses. Like Perino, he meticulously examines the congressional hearings? ?evidence? uncovered by Pecora, but arrives at a different conclusion than Perino. Benston finds that the hearings were largely biased in favor of the preconceived ideas of Senator Carter Glass (who introduced the provision for the separation of investment banking from commercial banking). Witnesses were purposely and strategically chosen, and the questioning was entirely one-sided, with no chance for rebuttals. Huertas and Silverman?s (1986) revisionist essay argues that Mitchell was in fact made a scapegoat of the stock market crash of 1929, something that, to be fair, Perino notes.

It seems that the image of Mitchell as an unscrupulous, tax-evading banker was in reality purposely created by Pecora in order to cement enough political support to enact the far-reaching New Deal reforms of the 1930s.


Benston, George J., 1990, The Separation of Commercial and Investment Banking: The Glass-Steagall Act Revisited and Reconsidered, New York: Oxford University Press.

Huertas, Thomas F. and Joan L. Silverman, 1986, ?Charles E. Mitchell: Scapegoat of the Crash?? Business History Review, 60: 81-103.

Jiang, Guolin, Paul G. Mahoney, and Jianping Mei, 2005, ?Market Manipulation: A Comprehensive Study of Stock Pools,? Journal of Financial Economics, 77: 147-70.

Kroszner, Randall S. and Raghuram G. Rajan, 1994, ?Is the Glass-Steagall Act Justified? A Study of the U.S. Experience with Universal Banking before 1933,? American Economic Review, 84: 810-32.

Puri, Manju, 1994, ?The Long-term Default Performance of Bank Underwritten Securities Issues,? Journal of Banking and Finance, 18: 397-418.

White, Eugene, 1986, ?Before the Glass-Steagall Act: An Analysis of the Investment Banking Activities of National Banks,? Explorations in Economic History, 23: 33-55.

Carlos D. Ramirez is Associate Professor of Economics at George Mason University. His major fields of research are banking and financial economic history. He has published banking and financial history articles in the Journal of Finance, Journal of Money, Credit, and Banking, Journal of Economic History, and Public Choice.

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Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

The Federal Reserve and the Bull Markets: From Benjamin Strong to Alan Greenspan

Author(s):Huston, Roger W. Spencer and John H.
Reviewer(s):Santoni, Gary J.

Published by EH.NET (July 2007)

Roger W. Spencer and John H. Huston, The Federal Reserve and the Bull Markets: From Benjamin Strong to Alan Greenspan. Lewiston, NY: Edwin Mellen Press, 2006. x + 251 pp. $110 (cloth), ISBN: 0-7734-5784-3.

Reviewed for EH.NET by Gary J. Santoni, Department of Economics, Ball State University.

This book by Roger Spencer and John Huston examines the relationship of Federal Reserve policy to stock market activity by focusing on the monetary policy responses of Benjamin Strong, William McChesney Martin Jr. and Alan Greenspan to the three major bull markets that occurred during their respective tenures as leaders of the Federal Reserve. The authors devote three chapters to discussions of each of these Fed officials and the bull markets they struggled with. A fourth chapter presents an empirical evaluation of the Fed’s policy response to heated stock market activity.

This is an interesting book. It begins with a very informative discussion of the relationship between the twelve district Federal Reserve Banks (particularly, the New York district bank), the Washington Federal Reserve Board and the U.S. Treasury during the Fed’s formative years. It discusses the various roles played by Carter Glass as author of the legislation that formed the Fed and his service as Secretary of the Treasury and (at the same time) member of the Washington Federal Reserve Board. The discussion presents a rather detailed account of the clashes of personalities and the different views of Glass, Strong (president of the New York Fed) and William Harding (president of the Washington Board) regarding Fed independence, the appropriate tools of policy, their application and, in particular, the role of the Fed in controlling speculative activity in the stock market. The discussion is lively and extensive excerpts from personal letters give the reader a real feel for the personalities and motives of the main characters.

A particularly illuminating example of the above is found in an excerpt from a letter to Senator Elihu Root from Benjamin Strong. In it Strong observes, “In their great desire to lay all of the troubles and fancied troubles of this country to the New York Stock Exchange, some of our legislators go to such length that it makes it difficult to decide where ignorance leaves off and willful misunderstanding begins.” I suspect there are relatively few present day Fed officials who come away from a Congressional hearing without similar thoughts. Financial arrangements and markets have evolved considerably since 1914 but the changes have apparently done little to alter the strife between these markets and some of those who occupy the political arena.

While this book studies the influence of stock market activity on the policy actions implemented by the Federal Reserve, the authors point out that each of their three principle characters (Strong, Martin and Greenspan) believed the Fed’s policy instruments to be ill suited to regulating prices in equity markets. Greenspan, for example, argued that the Fed can only check a bull market by rationing “credit severely enough to paralyze business itself.” Strong’s view was similar suggesting that if the Fed forced interest rates up to curb speculation it could penalize the entire country by slowing economic growth. Consequently, it may be better to simply allow speculators to suffer the ultimate consequences of their own excesses. To do otherwise, according to Strong, would result in a degeneration of Fed policy actions to those of “regulating the affairs of gamblers.”

Greenspan went even further in his critique of the use of monetary policy to curb speculative activity in a frothy market. Not only are the Fed’s tools too blunt to stem this activity without having unintended consequences, it is difficult to identify bubbles before they crash. Greenspan suggested that, “There is a fundamental problem with market intervention (on the part of the Fed). It presumes that you know more than the market. … This raises some fascinating questions about what our authority is and who makes the judgment that there actually is a bubble.” Later, in a speech given in 1996, he asked, “But how would we know when irrational exuberance has unduly escalated asset values …” (emphasis added).

Despite their reservations, each of the three attempted to tame the bull markets that arose during their tenures. Each failed. The markets crashed and the monetary policies that were intended to prick the bubbles contributed to the following decline in business activity in general.

The book does not tell us why these Fed leaders ignored their better instincts to become involved in attempts to regulate stock prices. That is disappointing. In fairness, Spencer and Huston do not completely buy the argument regarding the difficulty in detecting bubbles in equity prices, so, perhaps, they are more willing to accept the Fed’s intervention in these instances without question.

On the whole, this is a very enjoyable and informative book. I recommend it to those interested in the evolution of Fed independence, the development of its policy tools, and particularly, the role of the Fed in controlling speculative activity in the stock market.

Gary Santoni is an Emeritus Professor of Economics at Ball State University. His recent research is on federal regulation of securities markets and stock returns.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII